SPX Defensive Carry
Risk is the product
Structural return source
Sell SPX option protection and collect premium rather than forecast the next market move.
Risk is the product
Delta and vega hedging reduce exposure to market direction and volatility repricing.
Hard drawdown discipline
The strategy is managed for a -10% stop-loss mandate; realized current-regime max drawdown is -2.0%.
SDC seeks not to beat the S&P by taking more beta, but to preserve drawdown budget while compounding option premium.
The observed curve
The return gap is modest; the risk gap is large.
This curve is SPX Defensive Carry — a hedged option-premium strategy managed to a hard stop-loss.
View the strategy →A -10% mandate changes the benchmark
| Downside measure | SDC | S&P 500 |
|---|---|---|
| Max drawdown | -2.0% | -9.1% |
| Worst day | -1.2% | -2.6% |
| 95% CVaR | -0.5% | -1.7% |
| 99% CVaR | -1.0% | -2.2% |
| Distance to the -10% stop | 8.0 pts | 0.9 pts |
A stop-loss rule is path-dependent. A strategy that avoids deep drawdowns can remain invested while a higher-beta alternative is forced to liquidate before the rebound — and re-entry then becomes a market-timing decision.
Why the premium exists
Market timing is fragile
Directional timing requires being right twice — on entry and on exit — and missing a few major up days can materially damage long-run returns.
Protection has a persistent buyer
Investors pay for downside insurance through put options. Selling that protection monetizes the premium paid for risk transfer — provided tail risk is actively controlled.
Trade the second moment
Rather than forecast the first moment of price direction, the strategy focuses on volatility behavior: volatility clustering and implied-versus-realized pricing.
15.1% realized
Historical example: implied volatility above realized volatility is the economic reason premium exists to be harvested.
| CBOE PUT index, 1986–2018 | CBOE PUT | S&P 500 |
|---|---|---|
| Compound return | 9.54% | 9.80% |
| Standard deviation | 9.95% | 14.93% |
| Sharpe ratio | 0.65 | 0.49 |
| Max drawdown | -32.7% | -18.9% |
Put-writing validates the premium concept — but not the risk budget. The long-run PUT index matched the S&P's compound return with lower volatility and a higher Sharpe, yet its drawdown was more than three times the -10% mandate. Premium harvesting alone is not investable under a stop-loss.
Return engine, separate risk engine
Sell SPX option premium
Harvest compensation paid for financial insurance.
Delta hedge
Reduce first-order directional exposure to SPX.
Vega hedge
Reduce sensitivity to large implied-volatility repricing.
Dynamic sizing
Scale exposures to the risk budget and current conditions.
Hard stop-loss
A portfolio-level -10% mandate limits unacceptable path risk.
| Experimental vs mature | Experimental Jan 2023 – Jan 2026 | Mature since Feb 2026 |
|---|---|---|
| Sharpe | 1.5 | 4.4 |
| Sortino | 1.8 | 6.3 |
| Calmar | 1.3 | 7.6 |
| Volatility | 5.1% | 3.1% |
| Max drawdown | -6.3% | -2.0% |
| 95% CVaR | -0.9% | -0.5% |
Sharpe increased 3.0× while max drawdown fell 68%. The change described by the manager is the addition of delta and vega hedging.
Current-regime measures
| Current-regime statistic | SDC | S&P 500 |
|---|---|---|
| Total return | 10.0% | 11.4% |
| CAGR | 15.3% | 17.5% |
| Annualized volatility | 3.1% | 13.4% |
| Sharpe | 4.43 | 1.27 |
| Sortino | 6.29 | 1.94 |
| Calmar | 7.61 | 1.93 |
| Downside deviation | 2.2% | 8.8% |
| Worst day | -1.2% | -2.6% |
| 95% CVaR | -0.5% | -1.7% |
| 99% CVaR | -1.0% | -2.2% |
| Positive days | 72.6% | 50.9% |
| Max drawdown | -2.0% | -9.1% |
| Market sensitivity | Value | Reading |
|---|---|---|
| Beta vs S&P 500 | -0.03 | Little directional equity exposure |
| Correlation | -0.14 | Supports diversification |
| R-squared | 2.1% | S&P explains almost none of SDC variance |
| Annualized alpha | 14.9% | 0% risk-free assumption |
Measured over 169 matched S&P trading intervals since 2026-02-02. These are realized statistics over a short sample and may vary materially in future periods.
Peers and full history
| Entity | Period | Return |
|---|---|---|
| Millennium | 2026 YTD through Sep | 8.1% |
| SPX Defensive Carry (SDC) | Feb 2 – Oct 5, 2026 | 10.0% |
| Citadel Wellington | 2026 YTD through Sep | 13.4% |
| Bridgewater Pure Alpha | 2026 YTD through Sep | 18.4% |
| Graham Quant Macro | 2026 YTD through Sep | 21.9% |
| Graham Tactical Trend | 2026 YTD through Sep | 31.2% |
Peer figures are publicly reported 2026 YTD returns, generally through Sep 30; periods and strategies differ and peer risk statistics were not available in the cited reports. SDC stands out by pairing its return with transparently low realized risk.
| Full history | SDC | S&P 500 |
|---|---|---|
| Total return | 39.3% | 102.5% |
| CAGR | 9.2% | 20.6% |
| Volatility | 4.9% | 14.7% |
| Sharpe | 1.78 | 1.36 |
| Max drawdown | -6.3% | -18.9% |
First S&P -10% breach: Oct 27, 2023. No -10% breach was observed for SDC.
2023–2025 are development and experimental history: they show the concept surviving several regimes while the system was still being built, not its final form.
SPX is deep
| Category | Value | Unit |
|---|---|---|
| SPX Q1 2026 ADV | 4.9M | contracts per day |
| March 2026 SPX ADV | 5.4M | record monthly average |
| Q1 index options ADV | 6.1M | contracts per day |
| Q1 market-wide options ADV | 68.6M | contracts per day |
Deep listed liquidity supports execution, hedging and capacity far better than niche OTC or single-name strategies. Capacity still depends on strike and tenor mix, hedge turnover, market impact and stress conditions, so capital should scale in measured steps with live slippage monitoring.
Download the track-record workbook
Everything quoted on this page is reproducible from this workbook.
Haksun Li, Ph.D.
- Quantitative trader and analyst with multiple investment banks.
- Worked in New York, Tokyo, London and Singapore.
- Former vice dean of the Big Data Finance and Investment Institute, Fudan University.
- Teaching roles at multiple universities.
Apply quantitative methods to a structural market risk premium while treating drawdown control as a first-class design constraint.
Who this is for
- ✓Family offices prioritizing capital preservation
- ✓Investors with hard drawdown or stop-loss limits
- ✓Portfolios already carrying substantial equity beta
- ✓Allocators seeking a diversifying absolute-return sleeve
- Daily NAV with cash-flow reconciliation
- Broker and custodian statements
- Monthly risk report: drawdown, beta, delta, vega
- Stress tests and position limits
- Capacity and slippage monitoring
How these numbers were produced
- The current regime is measured from 2026-02-02 to 2026-10-05 — the first and last observed reporting dates after delta and vega hedging were added.
- The HK$2m capital injection on 2026-02-02 is excluded from SDC return calculations.
- Adjusted SDC returns from 2025-05-30 to 2025-06-03 are excluded from full-history statistics because NAV/Total crossed zero, consistent with a capital-flow discontinuity.
- Sharpe and regression alpha use a 0% risk-free rate.
- Option selling can incur rapid and nonlinear losses, especially in gaps and volatility shocks. Hedging and stop-losses reduce but do not eliminate risk.
- Sources: internal SDC/NAV workbook; Haksun Li strategy paper; FRED/SPDJI S&P 500 series; Reuters and Business Insider (Oct 1–2, 2026); Cboe Q1 and March 2026 options volume reports.
Track record, due-diligence pack and capacity questions go straight to the manager.
Confidential. For discussion only. Not an offer or solicitation. Past performance does not guarantee future results.